1. Discuss your future in the world of business.
2. Define business , and identify potential risks and rewards.
3. Describe the two types of economic systems: capitalism and command economy.
4. Identify the ways to measure economic performance.
5. Outline the four types of competition.
6.
Summarize the development of America’s business system.
7. Discuss the challenges that American businesses will encounter in the future.
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2 Chapter 1: Exploring the World of Business
I. Your Future in the Changing World of Business
A. Why Study Business?
1. For Help in Choosing a Career
2. To Be a Successful Employee
3. To Start Your Own Business
4. To Become a Better-Informed Consumer and Investor
B. Special Note to Students
II. Business: A Definition
A. The Organized Effort of Individuals
B. Satisfying Needs
C. Business Profit
III. Types of Economic Systems
A. Capitalism
B. Capitalism in the United States
1. Households
2. Businesses
3. Governments
C. Command Economies
1. Socialism
2. Communism
IV. Measuring Economic Performance
A. Economic Indicators
B. The Business Cycle
V. Types of Competition
A. Pure Competition
1. The Basics of Supply and Demand
2. The Equilibrium, or Market, Price
B. Monopolistic Competition
C. Oligopoly
D. Monopoly
VI. The Development of American Business
A. The Colonial Period
B. The Industrial Revolution
C. Early Twentieth Century
D. The Great Depression and Recovery
E. The Late Twentieth Century
F. The New Millennium
VII. The Challenges Ahead
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Chapter 1: Exploring the World of Business
Figure 1.1
Figure 1.2
Figure 1.3
This transparency lists the four types of resources (material, human, financial, and informational) that an entrepreneur must use to organize a business.
This transparency illustrates the relationship among sales revenue, expenses, and profits.
This transparency illustrates how our business system is guided by the interplay of buyers and sellers and how the role of government is taken into account.
Figure 1.4
Figure 1.5
This transparency illustrates changes in the gross domestic products in current dollars and in inflation-adjusted dollars.
This transparency illustrates the concepts of the supply curve and the demand curve.
Transparency 1.A This general chapter outline can be used to facilitate class instruction and to help students organize their notes.
Transparency 1.B This transparency is an exercise about types of competition that can be used for class discussion. Suggested answers for this exercise appear at the end of this chapter in this instructor’s manual.
Transparency 1.C This transparency is a debate that can be used for class discussion.
Transparency 1.D This is a chapter quiz consisting of five multiple-choice questions.
(Answers are 1. b; 2. c; 3. d; 4. b; and 5. a.)
Transparency 1.E This transparency lists the reasons for studying business.
Transparency 1.F This transparency provides a definition of business .
Transparency 1.G The major features of laissez-faire capitalism are shown in this figure.
Transparency 1.H This transparency compares three economic systems (capitalism, socialism, and communism).
Transparency 1.I This transparency provides definitions for productivity, gross domestic product, and inflation.
3
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4 Chapter 1: Exploring the World of Business
Transparency 1.A
—Chapter Outline
Transparency 1.D
—Chapter Quiz
Inside Business: The Container Store: A Breed Apart from Ordinary Businesses
Video Segment 1.A
—Overview (Time 1:13)
free enterprise.
I. YOUR FUTURE IN THE CHANGING WORLD OF BUSINESS
A. Now, people who are going to experience success must adapt to change in order to take advantage of the opportunities that are out there. To do so, you must bring something to the table that makes you different from the next person.
B. Why Study Business? Once you have education and knowledge, no one can take it away. Therefore, there are at least four reasons why you should study business.
Transparency 1.E
1. For Help in Choosing a Career. This business course will introduce you to a wide array of employment opportunities. One thing to remember as you think about what your ideal career might be is that a person’s choice of a career is ultimately a reflection of what he or she values and holds most important.
2. To Be a Successful Employee. To get a job in your chosen field and to be successful at it, you will have to develop a plan, or road map, that ensures you have the skills and knowledge the job requires. This course, your instructor, and all the resources available at your college or university can help you acquire the skills and knowledge you will need for a successful career.
Adapting to Change: Keep Your Career Moving in the Right Direction
3. To Start Your Own Business. Some people prefer to work for themselves, and they open their own businesses. a) To be successful, business owners must possess many of the same skills that successful employees have. b) It also helps if your small business can provide a product or service that customers want. c) E-business is the organized effort of individuals to produce and sell, for a profit, the products and services that satisfy society’s needs through the
Internet.
4. To Become a Better-Informed Consumer and Investor. By studying our business system, you will become a more fully informed consumer, which means that you will be able to make more intelligent buying decisions and spend your money more wisely. This same basic understanding of business will also make you a better-informed investor.
C. Special Note to Students. It’s important to begin reading this text with one thing in mind: this business course doesn’t have to be difficult. All the features in each
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Chapter 1: Exploring the World of Business 5 chapter have been evaluated and recommended by instructors with years of teaching experience. In addition, business students were asked to critique each chapter component. A number of student supplements to the text will help you explore the world of business, as well as the website that accompanies this edition.
II. BUSINESS: A DEFINITION
Video Segment 1.B Concept: Definition of Business (Time 3:48)
A. Business is the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs. To be successful, a business must be organized, it must satisfy needs, and it must earn a profit.
Transparency 1.F
B. The Organized Effort of Individuals. For a business to be organized, it must combine four kinds of resources: material, human, financial, and informational. (See
Figure 1.1.)
Transparency Figure 1.1
1. Material resources include the raw materials used in manufacturing processes, as well as buildings and machinery.
2. Human resources are the people who furnish their labor to the business in return for wages.
3. The financial resource is the money required to pay employees, purchase materials, and generally keep the business operating.
4. Information is the resource that tells the managers of the business how effectively the other resources are being combined and used.
5. Today, businesses are usually classified as one of three types. a) Manufacturing businesses process various materials into tangible goods. b) Service businesses produce services. c) Marketing intermediaries buy products from manufacturers and then resell them.
C. Satisfying Needs. The ultimate objective of every firm is to satisfy the needs of its customers. When the business understands its customers’ needs and works to satisfy those needs, it is usually successful.
D. Business Profit. Business profit is what remains after all business expenses have been deducted from sales revenue. (See Figure 1.2.) A negative profit, which results when a firm’s expenses are greater than its sales revenue, is called a loss.
The profit earned by a business becomes the property of its owners. In one sense, profit is the reward business owners receive for producing goods and services that consumers want. A business that cannot earn a profit is very likely to fail.
Transparency Figure 1.2
Accounting Scandals: What Went Wrong
This information is provided as a guide for classroom discussion of the questions at the end of the Examining Ethics boxed feature in this chapter.
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6 Chapter 1: Exploring the World of Business
1. Why would the Sarbanes-Oxley Act specifically require lawyers to notify top manag ers or the company’s board of directors about questionable accounting activities? Legislators were aware that company employees and managers often ask lawyers for legal advice before contemplating risky or uncertain actions. As a result, the lawyers are likely to learn about questionable activities before others in the company. If they are required to tell senior management or the board of directors about these activities, the company will be able to investigate and prevent damage much earlier. In this way, the lawyers will also be protecting the interests of shareholders and other stakeholders, not just the legal position of the corporate entity or its managers.
2. What additional legal and managerial changes would you suggest to prevent the use of accounting tricks to manipulate corporate earnings?
Students may suggest a variety of legal and managerial changes. One example is to require that managers in the financial and accounting departments rotate assignments every year or two. This will reduce the possibility of ongoing schemes to misrepresent corporate earnings or fraud going undetected. It will also allow incoming managers to review their predecessors’ work and identify questionable practices for investigation. Another example is to have all financial and accounting managers and employees certify every year that they have not been influenced to manipulate the figures in any way, have not personally manipulated the figures, and have not influenced others to manipulate the figures. This proposal would help make individuals more accountable for their own actions and cause them to report attempts by others to influence the figures.
III. TYPES OF ECONOMIC SYSTEMS
A. Economics is the study of how wealth is created and distributed.
1. By “wealth” we mean anything of value. “How wealth is distributed” simply means “who gets what.” The way in which people deal with the two issues determines the kind of economic system, or economy , that a nation has.
2 . Factors of production are the resources used to provide goods and services.
There are four such factors: a) Land and natural resources —elements in their natural state that can be used in production, such as crude oil, forests, minerals, land, water, and even air. b) Labor —human resources such as managers and employees. c) Capital —money, facilities, equipment, and machines used in the operation of organizations. d) Entrepreneurship —the willingness to take risks and the knowledge and ability to use the other factors of production efficiently. An entrepreneur is a person who risks his or her time, effort, and money to start and operate a business.
3. A nation’s economic system significantly affects all the economic activities of its citizens and organizations. A country’s economic system provides answers to four basic economic questions. a) What goods and services —and how much of each—will be produced? b) How will these goods and services be produced? c) For whom will these goods and services be produced? d) Who owns and controls the major factors of production?
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Chapter 1: Exploring the World of Business 7
B. Capitalism. Capitalism is an economic system in which individuals own and operate the majority of businesses that provide goods and services. It stems from the theories of Adam Smith. In this book, Wealth of Nations , published in 1776, he argued that a society’s interests are best served when the individuals within that society are allowed to pursue their own self-interest.
Transparency 1.C
1. Adam Smith’s capitalism is based on four fundamental issues.
Transparency 1.G a) First, the creation of wealth is properly the concern of private individuals, not of government. b) Second, private individuals must own the resources used to create wealth, and the owners of resources should be free to determine how these resources are used. c) Third, Smith contended that economic freedom ensures the existence of competitive markets that allow both sellers and buyers to enter and exit as they choose. The freedom to enter or leave a market at will has given rise to the term market economy (sometimes referred to as a free-market economy) —an economic system in which businesses and individuals make the decisions about what to produce and what to buy; the market determines how much is sold and at what prices. d) Finally, in Smith’s view, the role of government should be limited to providing defense against foreign enemies, ensuring internal order, and furnishing public works and education. With regard to the economy, government should act only as rule maker and umpire.
2. Smith believed that each person should be allowed to work toward his or her own economic gain, without government interference. The French term “laissez faire” describes Smith’s system; loosely translated it means “let them do” (as they see fit).
Private enterprise is an economy open to new ideas, new products, new jobs, new men.
—William Benton
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8 Chapter 1: Exploring the World of Business
C. Capitalism in the United States. The U.S. economy is a mixed economy , so called because it exhibits elements of both capitalism and socialism. In today’s economy, the four basic economic questions are answered by three groups. (See Figure 1.3.)
Transparency Figure 1.3
1. Households. Households are consumers of goods and services, as well as owners of some of the factors of production. a) As “resource owners,” the members of households provide businesses with labor, capital, and other resources. b) As “consumers,” household members use their income to purchase the goods and services produced by business. Almost two-thirds of our nation’s total production consists of consumer products : goods and services purchased by individuals for personal consumption.
2. Businesses. Like households, businesses are engaged in two different exchanges. They exchange money for natural resources, labor, and capital, and they use these resources to produce goods and services. Then they exchange their goods and services for sales revenue.
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Chapter 1: Exploring the World of Business
3. Governments. Government provides a variety of services that are considered important but either (1) would not be produced by private business firms or (2) would be produced only for those who could afford them (e.g., national defense, police/fire protection, education, and construction of roads and highways).
D. Command Economies. A command economy is an economic system in which the government decides what will be produced, how it will be produced, who gets what is produced, and who owns and controls the major factors of production. Four basic economic questions are answered, at least to some degree, through centralized government planning.
1. Socialism. In a socialist economy, the key industries are owned and controlled by the government. Depending on the country, private ownership of smaller businesses is permitted to varying degrees. What to produce and how to produce it are determined in accordance with national goals.
2. Communism. In a communist economy, almost all economic resources are owned by the government. The basic economic questions are answered through centralized state planning, which also sets prices and wages.
Emphasis is placed on the production of goods the government needs rather than on the products that consumers might want. Karl Marx was the father of communism.
Transparency 1.H
IV. MEASURING ECONOMIC PERFORMANCE
Transparency 1.I
A. Economic Indicators
1. One way to measure a nation’s economic performance is to assess its productivity. Productivity is the average level of output per worker per hour. An increase in productivity results in economic growth.
2. A nation’s gross domestic product (GDP) is the total dollar value of all goods and services produced by all people within the boundaries of a country during a one-year period. a) This GDP figure facilitates comparisons between the United States and other countries because it is the standard used in international guidelines for economic accounting. b) To make accurate comparisons of GDP figures for two different years, we must adjust the figures for inflation. Inflation is a general rise in the level of prices. “Real” gross domestic product is the total dollar value, using inflation-adjusted figures, of all goods and services produced by a nation.
(See Figure 1.4.)
Transparency Figure 1.4
3.
There are other economic ratios that can be used to measure a nation’s economy. (See Table 1.1.)
Communism: Nobody’s got nothing, but everybody’s working.
—Fred Allen
9
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10 Chapter 1: Exploring the World of Business
B. The Business Cycle. A nation’s economy fluctuates rather than grows at a steady pace every year. These fluctuations are generally referred to as the business cycle ; that is, the recurrence of periods of growth and recession in a nation’s economic activity. Generally, the business cycle consists of four states: the peak (sometimes referred to as prosperity), recession, the trough, and recovery.
Video Segment 1.C Concept: Business Cycle (Time 3:29)
1. During the peak period, unemployment is low, total income is relatively high, and consumers are willing to buy products and services. Businesses often expand and offer new products and services.
2. Economists define a recession as two or more consecutive three-month periods of decline in a country’s gross domestic product. Unemployment rises during a recession and total buying power declines. Economists define a depression as a severe recession that lasts longer than a recession.
3. The third phase of the business cycle, the “trough” of a recession or depression, is the phase in which the nation’s output and unemployment bottom out and reach their lowest levels. To offset the effects of recession and depression, the federal government uses both monetary and fiscal policies. a) Monetary policies are the Federal Reserve’s decisions that determine the size of the supply of money in the nation and the level of interest rates. b) The government can also use fiscal policy to influence the amount of savings and expenditures by altering the tax structure and changing the levels of government spending. c) Although the federal government collects over $2 trillion in annual revenues, the government often spends more than it receives, resulting in the federal deficit . d) The total of all federal deficits is called the national debt .
4. The last economic state is recovery. Recovery is the movement of the economy from depression or recession to prosperity; a greater demand for products and services results.
V. TYPES OF COMPETITION
A. Business competition is essentially a rivalry among businesses for sales to potential customers. Economists recognize four different degrees of competition, ranging from ideal, complete competition to no competition at all. These are pure competition, monopolistic competition, oligopoly, and monopoly.
B. Pure Competition. Pure competition is a market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product. In pure competition, buyers and sellers must accept the going price.
1. The Basics of Supply and Demand. The supply of a particular product is the quantity of the product that producers are willing to sell at each of various prices. The demand for a particular product is the quantity that buyers are willing to purchase at each of various prices. (See Figure 1.5.)
Transparency Figure 1.5
2. The Equilibrium, or Market, Price . Under pure competition, the market price of any product is the price at which the quantity demanded is exactly equal to the quantity supplied. Market prices are affected by anything that effects supply and demand.
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Chapter 1: Exploring the World of Business 11
C. Monopolistic Competition. Monopolistic competition is a market situation in which there are many buyers along with a relatively large number of sellers. The various products available in this market are similar and intended to satisfy the same need.
However, each seller attempts to make its products different. Product differentiation is the process of developing and promoting differences between one’s products and all similar products.
D. Oligopoly. An oligopoly is a market situation (or industry) in which there are few sellers. These sellers are quite large and must make sizable investments to enter into their markets. Because there are few sellers, the market actions of each can have a strong effect on competitors’ sales.
E. Monopoly. A monopoly is a market (or industry) with only one seller. A firm in a monopoly position must consider the demand for its product and set the price at the most profitable level. A natural monopoly is an industry that requires a huge investment in capital and within which any duplication of facilities would be wasteful.
Many public utilities are still classified as natural monopolies, but competition is increasing in many industries.
Transparency 1.B
1. In addition to natural monopolies, another type of legal monopoly —sometimes referred to as “limited monopoly”—is created when the federal government issues a copyright, patent, or trademark.
2. Except for natural and limited monopolies, federal anti-trust laws prohibit both monopolies and attempts to form monopolies.
VI. THE DEVELOPMENT OF AMERICAN BUSINESS
Refer to Figure 1.6 for a “Time Line of American Business.”
A. The Colonial Period. Almost all families lived on farms, and the entire family worked at the business of surviving.
1. The early colonists used barter —a system of exchange in which goods or services are traded directly for other goods and/or services without using money.
2. The domestic system was a method of manufacturing in which an entrepreneur distributed raw materials to various homes, where families would process them into finished goods.
B. The Industrial Revolution
1. In 1790 Samuel Slater, an Englishman, set up a textile factory in Rhode Island to spin raw cotton into thread. Slater’s ingenuity resulted in America’s first use of the factory system of manufacturing, in which all the materials, machinery, and workers required to manufacture a product are assembled in one place.
2. By 1814 Francis Cabot Lowell had established a factory in Waltham,
Massachusetts, to spin, weave, and bleach cotton all under one roof. Lowell used a manufacturing technique called specialization. Specialization is the separation of a manufacturing process into distinct tasks and the assignment of different tasks to different workers for the purpose of increasing efficiency of industrial workers.
3. The three decades from 1820 to 1850 were the golden age of invention and innovation in machinery.
4. At the same time, new means of transportation greatly expanded the domestic markets for American products and by 1900 the nation shifted from a farm economy to a manufacturing economy.
C. Early Twentieth Century
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12 Chapter 1: Exploring the World of Business
1. Industrial growth and prosperity continued well into the twentieth century. By the 1920s the automobile industry had begun to influence the entire economy.
2. Fundamental changes occurred in business ownership and management.
Certain modern marketing techniques are products of this era. Capitalism and our economy seemed strong and healthy, but it was not to last.
D. The Great Depression and Recovery
1. The Roaring Twenties ended with the sudden crash of the stock market in
1929 and the near collapse of the economy. The Great Depression that followed in the 1930s was a time of misery and human suffering.
2. After Franklin D. Roosevelt became president in 1933, the federal government got deeply involved in business for the first time by implementing programs to get the economy moving again.
3. The economy was on the road to recovery when World War II broke out in
Europe in 1939. The 1940s, 1950s, and 1960s witnessed both increasing production and a rising standard of living. Standard of living is a loose, subjective measure of how well off an individual or a society is, mainly in terms of want satisfaction through goods and services.
E. The Late Twentieth Century
1. In the mid-1970s, a shortage of crude oil led to a new set of problems for business. As the cost of petroleum products increased, a corresponding increase took place in the cost of energy and the cost of goods and services.
2. The result was inflation at a rate well over 10 percent per year during the early
1980s.
3. By the mid-1980s, many of these problem areas showed signs of improvement. Unfortunately, many managers now had something else to worry about —corporate mergers and takeovers. Also, a large number of bank failures, coupled with an increasing number of bankruptcies, again made people uneasy about our business system.
4. By the early 1990s, the U.S. economy began to show signs of improvement and economic growth. Business took advantage of this economic prosperity to invest in information technology, cut costs, and increase flexibility and efficiency. The Internet became a major force in the economy, and the stock market enjoyed the longest period of sustained economic growth in our history.
5. Unfortunately, by the last part of the twentieth century, business failures and declining stock values were signs that economic problems were on the way.
F. The New Millennium. According to economic experts, the first years of the new millennium might be characterized as the best of times and the worst of times rolled into one package.
1. On the plus side, technology became available at an affordable price. Ebusiness became an accepted method of conducting business. The growth of service businesses and increasing opportunities for global trade have changed the way American firms do business.
Talking Technology: What B2B and B2C Really Mean
2. On the negative side, there is still a certain amount of pessimism surrounding the economy. Factors causing this “feeling” include business failures, factory closings, unemployment rates, lower stock values, and the tragic events of
September 11.
VII. THE CHALLENGES AHEAD
A. When our business system works well, it provides jobs for those who are willing to work, a standard of living that few countries can match, and many opportunities for
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Chapter 1: Exploring the World of Business 13 personal advancement. But our system is far from perfect. The system could be improved.
B. Some of the questions to be resolved include:
1. How can we encourage Iraq to establish a democratic and free society and resolve possible conflict with North Korea and other countries throughout the world?
2. How can we create a more stable economy and create new jobs for those who want to work?
3. How can we restore the public’s trust in corporate financial matters?
4. How can we meet the challenges of managing culturally diverse work forces to meet the needs of a culturally diverse marketplace?
5. How can we make American manufacturers more productive and more competitive with foreign producers who have lower labor costs?
6. How can we encourage an entrepreneurial spirit in large, established corporations?
7. How can we preserve the benefits of competition in our American economic system?
8. How can we encourage economic growth and at the same time continue to conserve natural resources and protect our environment?
9. How can we finance additional investment spending on information technology and replacement of obsolete machinery and equipment?
10. How can we best market American-made products in foreign nations?
11. How much government involvement in our economy is necessary for its continued well-being? In what areas should there be less involvement? In what areas, more?
12. How can we evaluate the long-term economic costs and benefits of existing and proposed government programs?
13. How can we meet the needs of the less fortunate?
The answers to the problems described in this section are anything but simple. Yet they directly affect our own future, our children’s future, and the future of our nation.
Within the American economic and political system, the answers are ours to provide.
Video Segment 1.D Case: Stonyfield Farm’s “Yogurt on a Mission” (Time 15:37)
A sound economy is a sound understanding brought into action. It is calculation realized; it is the doctrine of proportion reduced to practice; it is foreseeing contingencies and providing against them; it is expecting contingencies and being prepared for them.
—Hannah More
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14 Chapter 1: Exploring the World of Business
1. The Container Store is often cited as an outstanding retail company. What factors have led to its success?
The Container Store has worked hard to provide goods and services that satisfy customer s’ needs. It was the first retail company to recognize and serve the growing need for organization and storage products among consumers and small businesses. In addition, its employees are both knowledgeable (thanks to extensive training) and service-oriented. And it has forged close, enduring ties with makers of innovative and practical storage products. Over time, the company has developed a highly positive reputation among customers, suppliers, the work force, and potential employees. This allows the Container Store to continue expanding and building profits.
2. Would you want to work for a firm like the Container Store? Explain your answer.
Students will offer varying responses to this question. Ask students to think about retailing in general and the Container Store in particular as they respond. They should also touch on issues discussed in the chapter, including opportunity, professional development, and need satisfaction. How would working at the Container Store fit with their individual interests and abilities? Do they like working directly with customers? Are they looking for a varied work schedule rather than the traditional 9 to 5 schedule of most office positions? Students may want to list the advantages and disadvantages of working for such a company as they consider their response.
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Chapter 1: Exploring the World of Business 15
1. What reasons would you give if you were advising someone to study business?
There are four compelling reasons for studying business described in this chapter: a. To start your own business b. For help in choosing a career c. To be a successful employee d. To become a better informed consumer and investor
2. What factors affect a person’s choice of career?
Deciding what kind of career you want to devote your life to can be both daunting and puzzling, especially when you don’t know what all the possibilities are. Choices range from small, local businesses owned by one individual to large corporations with offices and facilities in countries around the globe. There are also employment opportunities with federal, state, county, and local governments and with not-for-profit organizations. One thing to remember when choosing a career is that a person’s choice of a career is ultimately a reflection of what he or she values and holds most important. What you choose to do with your life will be based on what you feel is most important.
3. Describe the four resources that must be combined to organize and operate a business. How do they differ from the economist’s factors of production?
The four resources are (1) material resources, which include raw materials used in the manufacturing process as well as buildings and machinery; (2) human resources, the people who furnish their labor to the business in return for wages; (3) financial resources, which is money used to pay employees, purchase materials, and keep the business operating; and (4) information, which tells the managers of the business how effectively the other resources are being combined and used. Economists refer to the factors of production as the resources used to produce goods and services. They are land and natural resources, labor, capital, and entrepreneurship.
4. What distinguishes consumers from other buyers of goods and services?
Consumers purchase goods and services produced by business for their own personal use rather than to resell to others. Consumers, as a group, are the biggest customer of
American business.
5. Describe the relationship among profit, business risk, and the satisfaction of customers’ needs.
The business that is able to successfully satisfy customers’ needs is said to be the business that will realize the greatest profit potential. Profit is also the payment that business owners receive for assuming the risks of ownership. These risks include not being paid and losing whatever they have invested into the business.
6. What are the four basic economic questions? How are they answered in a capitalist economy?
The four basic economic questions are (1) what goods and services and how much of each to produce, (2) how to produce, (3) for whom to produce, and (4) who owns and controls the factors of production. In a capitalist economy, the first question is answered by consumers as they spend their money. The second question is answered by
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16 Chapter 1: Exploring the World of Business producers as they compete for sales and profits. The third question is answered by those who have the money to buy the product. The fourth question is answered by who provides the land and natural resources, labor, capital, and/or entrepreneurship. The distribution of goods and services, therefore, depends on the current prices of economic resources, goods, and services, and who can afford to buy them.
7. Describe the four fundamental issues required for a laissez-faire capitalist economy. a. The creation of wealth is the concern of private individuals, not of government. b. Private individuals must own the resources used to create wealth and should be free to determine how these resources are used. c. The existence of competitive markets gives sellers and buyers the right to make decisions about what to produce and what to buy, and the market determines how much is sold and at what prices. d. Government’s role should be limited to providing defense against foreign enemies, ensuring internal order, and furnishing public works and education.
8. Why is the American economy called a mixed economy?
Our economy is a mixed economy because it exhibits elements of both capitalism and socialism.
9. Based on Figure 1.3, outline the economic interactions between business and households in our business system.
See Figure 1.3. In the circular flow that characterizes our business system, a. Households are the resource owners and provide businesses with natural resources, labor, and capital. Households are also consumers who use their income to purchase the goods a nd services produced by businesses. Today’s households purchase approximately twothirds of our nation’s total production. b. Businesses purchase households’ natural resources, labor, and capital and use these resources to produce goods and services that are exchanged for sales revenue. This revenue is exchanged once again for households’ resources.
10. How does capitalism differ from socialism and communism?
Capitalism is a market economy (sometimes referred to as a free-market economy). The basic economic questions are answered by private business owners who control the factors of production. Socialism and communism, on the other hand, are controlled by government planning and government ownership. Decisions are made by government planners and, in many cases, the wants and needs of the government are more important than those of consumers.
11. Define gross domestic product. Why is this economic measure significant?
Gross domestic product (GDP ) is the total dollar value of all goods and services produced by all people within the boundaries of a country during a one-year period.
GDP as an economic measure is important because it is a measure of a nat ion’s economic output. It facilitates comparisons between the United States and other countries, since it is the standard used in international guidelines for economic accounting. GDP allows observers to determine, over several time periods, the extent of economic growth.
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Chapter 1: Exploring the World of Business 17
12. Choose three of the economic measures described in Table 1.1 and describe why these indicators are important when measuring a nation’s economy.
While student answers will vary depending on the term they choose, you may want to review the material in Table 1.1. Each of the following seven terms are defined: balance of trade, consumer price index, inflation rate, prime interest rate, producer price index, productivity rate, and unemployment rate.
13. Identify and compare the four forms of competition.
The four forms of competition are pure competition, monopolistic competition, oligopoly, and monopoly.
Under pure competition, there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product. Under monopolistic competition, there are many buyers and a relatively large number of sellers who differentiate their products from the products of competitors. An oligopoly is a market situation in which there are few sellers, so the market actions of each seller have a strong effect on competitors’ sales. A monopoly is a market with only one supplier of the product.
14. Explain how the equilibrium, or market, price of a product is determined.
Under pure competition, the market price of any product is the price at which the quantity demanded is exactly equal to the quantity supplied.
15. Trace the steps that led from farming for survival in the American colonial period to today’s mass production.
In the beginning, the colonists produced what they needed to survive. Then they started to produce more than they could consume themselves. They used their surplus for trading by barter. Soon a domestic system was formed in which an entrepreneur distributed raw materials to various homes where families finished the products. The factory system was started, wherein all materials, machinery, and workers required to manufacture a product were assembled in one place. Specialization brought the separation of the manufacturing process into distinct tasks and the assignment of different tasks to different individuals. The three decades from 1820 to 1850 were the golden age of invention and innovation in machinery. The period from 1870 to 1900 witnessed a second revolution with many of the characteristics of our modern business system. The United States shifted from a farm economy to a manufacturing economy.
During this time the United States became not only an industrial giant but a leading world power as well.
16. What do you consider the most important challenges that will face people in the
United States in the years ahead?
Student answers will vary. While discussing this question, you may want to refer to the list of issues that will challenge American business in the section entitled, “The
Challenges Ahead.”
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18 Chapter 1: Exploring the World of Business
1. In what ways have the economic problems that the nation has experienced in the past three years affected business firms? In what ways have these problems affected employees?
The tragic events of September 11 and the war on terrorism have caused the economy to nosedive and the stock market to lose approximately one-third of its value. These incidents have forced businesses to examine the way they do business. Fortunately, our economic system allows businesses (within limits imposed to ensure public safety), through our free enterprise system, to produce any legal good or service and attempt to sell it at the price they set.
Many employees have lost faith in our economic system that has enabled the people in the United States to enjoy the highest standard of living in the world. Employees must now adapt to the changing environment to take advantage of employment prospects.
2. What factors caused American business to develop into a mixed economic system rather than some other type of economic system?
The shrinking size of the globe, the intervention of foreign competition, the Great
Depression, World Wars I and II, and the ever-increasing age of our population (among other factors) have contributed to our mixed economic system.
3. Does an individual consumer really have a voice in answering the basic economic questions?
Yes, each individual votes in the competitive marketplace with his or her dollars.
4. Is gross domestic produc t a reliable indicator of a nation’s economic health? What might be a better indicator?
Currently, gross domestic product is the measure used by the nations of the world. A system that measures only those goods and services that contribute directly to the standard of living of the nation’s citizens might be better.
5. Discuss this statement: “Business competition encourages efficiency of production and leads to improved product quality.”
If there are several products of the same type, the consumer will purchase the products of better quality. Businesses are thus forced to improve their products constantly to maintain or enlarge their share of the market.
6. In our business system, how is government involved in answering the four basic economic questions? Does government participate in the system or interfere with it?
The government is involved in answering the four basic economic questions with regard to promoting public welfare. The question of what goods and services will be produced is answered when government provides goods and services that would not be produced by private enterprise or that would otherwise be too expensive for the average citizen. The question of how these goods and services will be produced is answered by government through taxation that is necessary to pay for goods and services society needs. The question of who will receive these goods and services is answered by the government through programs such as national defense, police and fire protection, education, and construction of roads and highways. The question of who owns the major factors of
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Chapter 1: Exploring the World of Business 19 production is answered by government insuring that all factors of production are available and shared by businesses involved in a capitalistic society.
Student answers will vary on whether government participates or interferes in the system.
7. Choose one of the challenges listed on pages 26-27 and describe possible ways that business and society could help solve or eliminate the problem in the future.
Students’ answers will vary, depending on the challenge chosen by the student.
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20 Chapter 1: Exploring the World of Business
Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide.
1. As a business, what needs does Stonyfield satisfy for its customers?
Students may identify a number of needs satisfied by Stonyfield Farm. First is the need for high-quality, nutritious food. Second is the need for healthy food produced without potentially dangerous pesticides and other additives or hormones. Third is the need to feel good about supporting companies that go out of their ways to protect the environment. And fourth is the need to feel good about supporting companies that help keep family farmers in business.
2. Does the yogurt market reflect monopolistic competition or an oligopoly? Support your answer by discussing how Ston yfield’s diverse line of organic foods helps the company to compete.
The yogurt market is closest to monopolistic competition because there are millions of buyers and a fairly large number of sellers. Stonyfield, like its competitors, differentiates its products by offering a wide variety of organic foods in different packaging and forms.
The case notes, for example, that the company sells refrigerated yogurts, ice cream, frozen yogurt, soft-serve yogurt, cultured soy snacks, and drinkable yogurts. Ask students whether the yogurt market could be considered an oligopoly if only a small number of big businesses (like Groupe Danone) control the most popular brands (in this case, Danon and Stonyfield, among others). Remind them to consider whether sellers in the yogurt market can strongly influence competitive sales and pricing, as in the car industry.
3. Why would a firm like Stonyfield embrace environmental causes and the concept of increasing sales and profits?
For Stonyfield Farm, social responsibility is a part of their corporate culture —just like earning profits. Historically, these two concepts have often been viewed as opposing forces for a business firm. Today, many management experts would argue that being environmentally sensitive and socially responsible are good business and can actually lead to larger profits. From a practical standpoint, Stonyfield’s environment efforts makes a compelling story that will attract more loyal customers for a firm that sells only the
“best” yogurt.
4. From the perspective of business profit, should Groupe Danone keep contributing to environmental causes for many years after Hirshberg leaves? Why?
Students who say that Groupe Danone should keep contributing long after Hirshberg leaves may argue that the brand was built on the basis of social responsibility.
Continuing to contribute would show customers that Groupe Danone is truly committed to a social responsibility agenda. Ending the contributions to environmental causes could change the way loyal customers view the brand and hurt both sales and profits. Students who take the opposite view may argue that Groupe Danone is not contractually obligated to continue contributing beyond a certain point. Therefore, the company is free to contribute to other social causes, depending on its overall social responsibility agenda and its long-term profit plans for the Stonyfield brand. Ask students to consider how
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Chapter 1: Exploring the World of Business 21 customers might find out about any changes that Groupe Danone makes in its donations on behalf of Stonyfield. Also ask about any possible shifts they might envision in the future attitude of customers toward supporting social causes through Stonyfield’s philanthropy.
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22 Chapter 1: Exploring the World of Business
1. Exploring the Internet
Suggestions for using each Exploring the Internet exercise are contained on the
Houghton Mifflin website for Pride/Hughes/Kapoor. By using a website, we can replace outdated material with the most up-to-date material available. For more information visit the Business site at Houghton Mifflin’s College Division home page at http://college.hmco.com/business/instructors/.
2. Developing Critical Thinking Skills
The answers will vary depending on the students’ ages and interests, how familiar they are with their local car dealerships, and what they know about financing. Competition promotes a wide range of products —in this case, models of automobiles and types of financing —to consumers. Competition affects the prices of the product —automobiles and interest rates —and the types of services offered by dealerships and financial institutions.
Competition encourages manufacturers and financial institutions to improve their quality by offering better products and better services to their consumers. Competition impacts the way business is done. For example, competition affects the way salespeople differentiate their a utomobiles from their competitors’ makes and models and the way financial packages are offered to borrowers.
Students should recognize that the auto industry is dominated by a few manufacturers and, therefore, operates as an oligopoly type of competition, which restricts them from setting prices by agreement. The amount and degree of competition are determined by the availability of resources in a community.
3. Building Team Skills
Giving students an opportunity to learn something about their classmates will decrease fears, allow relationships and trust to develop, and help move the class toward being a team. The number of students will determine how much time you can devote to each step in the process.
The instructor’s role is to keep track of the time and move the students along. Emphasize that time is a resource in the workplace and that time is money. How time is spent can make a difference in the results achieved. Use time wisely.
4. Researching Different Careers
The answers will vary depending on what information the students are able to find. An entrepreneurial environment spurs creativity and encourages new product development, while an entrepreneurial attitude allows an employee to take risks and try new and different things. Solving difficult problems requires moving outside a perceived set of assumptions; this is where an entrepreneurial attitude helps.
Employees are rewarded in many different ways —from cash to promotions. The philosophy of the company determines how it values entrepreneurship and how employees are rewarded for their efforts.
5. Improving Communication Skills
Establish a set of guidelines for students who want to keep a journal. Use the following ideas and add points that are important to your class/college:
Number of weeks the students should write in their journals
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Chapter 1: Exploring the World of Business 23
Date the journal is due
The format to be used for journal entries
How the exercise will count toward the final term grade
The items to be included in the final report
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24 Chapter 1: Exploring the World of Business
Select the correct answer.
1. T F Free enterprise is a system of business in which individuals decide what to produce and how to produce it.
2. T F Less than 50 percent of small businesses fail within the first five years.
3. T F Business is the organized effort of individuals to produce and sell, for a profit, the products and services that satisfy society’s needs.
4. T F Adam Smith argued that a society’s interests are best served when individuals are allowed to pursue their own self interest.
5. T F The business cycle consists of two or more consecutive three-month periods of decline in a country’s GDP.
Circle the letter before the most accurate answer.
6. A general rise in the level of prices is called a. free enterprise. b. inflation. c. gross domestic product. d. depression. e. monopoly.
7. A market situation in which there are many buyers and sellers of a product, and no single buyer or seller can control the price is a. an oligopoly. b. a monopolistic marketplace. c. a monopoly. d. pure competition. e. a laissez-faire market.
8. A system of exchange in which goods or services are exchanged without using money is called a. a barter system. b. free enterprise. c. monetary policy. d. fiscal policy. e. monopolistic competition.
9. The separation of a manufacturing process into distinct tasks is referred to as a. barter. b. specialization. c. factory system. d. domestic system.
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Chapter 1: Exploring the World of Business 25 e. an economy of scale.
10. A method of manufacturing in which all materials, machinery, and workers are assembled in one place is called the a. economic system. b. domestic system. c. Slater’s system. d. factory system. e. an oligopoly.
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26 Chapter 1: Exploring the World of Business
Select the correct answer.
1. T F Today the terms business and e-business mean the same thing.
2. T F Wal-Mart and Target are often referred to as marketing intermediaries.
3. T F Profit is the payment that business owners receive for assuming the considerable risks of ownership.
4. T F Approximately onethird of our nation’s total production consists of consumer products.
5. T F A monopoly is a market (or industry) with only one seller.
Circle the letter before the most accurate answer.
6. Which of the following is not one of the four resources used by business today? a. Material b. Informational c. Governmental d. Financial e. Human
7. Today, the U.S. economy is often characterized as a __________ economy. a. laissez-faire b. command c. socialist d. mixed e. Smithsonian
8. Many economists refer to the average level of output per worker per hour as a. productivity. b. inflation. c. the business cycle. d. real GDP. e. the trough.
9. Which of the following is not one of the four states in a business cycle? a. Peak b. Recession c. Trough d. Recovery e. Deficit
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Chapter 1: Exploring the World of Business 27
10. Before leaving England, __________ memorized the plans for a water-powered spinning machine and set up a textile plan in Pawtucket, Rhode Island. a. Eli Whitney b. Franklin Roosevelt c. Samuel Slater d. Mark Cuban e. Cyrus McCormick
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28 Chapter 1: Exploring the World of Business
1. T
2. F
3. T
4. T
5. F
6. b
7. d
8. a
9. b
10. d
1. F
2. T
3. T
4. F
5. T
6. c
7. d
8. a
9. e
10. c
1. Pure competition:
2. Monopolistic product —farm produce specific firm —grocery store product —toothpaste
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Chapter 1: Exploring the World of Business 29 competition:
3. Oligopoly:
4. Monopoly: specific firm —grocery, drug, and convenience stores product —automobiles specific firm —automobile dealership product —electric utility specific firm —local utility company
1. b
2. c
3. d
4. b
5. a
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